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How To Use Ichimoku Cloud Trading Strategy

Ichimoku cloud is a type of technical analysis method that is often simply called Ichimoku. It is based on Japanese candlestick charting to predict future price movements.

Only in the 1960s did Ichimoku came to the attention of the public when a Japanese journalist named Ichimoku Sanjin, also known as Goichi Hosoda, released it publicly after three decades perfecting it.

The idea behind the Ichimoku Cloud Strategy is to use a moving-average based trend method to indicate where a stock is likely headed next.

In addition to price action, Ichimoku uses time as another element, and because greater data points are used, it is generally regarded as providing a clearer picture than Japanese Candlesticks.

How The Ichimoku Cloud Strategy Works

Ichimoku cloud is designed to spot direction and momentum in order to help you make buy and sell decisions more easily.

Five indicators are used with each corresponding to a different timeline.

Ichimoku Cloud

The cloud is known as the Kumo and is what grabs your attention right away because it’s the most noteworthy of the five indicators.

When prices are above the cloud, the trend is positive. And when prices fall below the cloud, the trend is negative.

When the price action takes place within the cloud, it is believed that the trend is flat.

But how do you know when the trend is strong?

Leading Span A Line

The next indicator or line to pay close attention to is the Leading Span A, which is also known as Senkou Span A.

When share prices rise above the Leading Span A, the top line acts as support while the lower line acts as a second support level.

Leading Span B Line

On the other edge of the Kumo or cloud is the Leading Span B line, which is called the Senkou Span B.

When the Leading Span A line rises above the Leading Span B line, the uptrend is strong. On technical charts, this produces a green cloud.

Conversely, when the Leading Span B line falls below the Leading Span A line, the downtrend is strong. Generally, this is represented by a red cloud.

But how can you use Leading Span A and Leading Span B lines to identify resistance and support?

How To Spot Resistance and Support

The way the Leading Span A & B lines are constructed means the the clouds which form are plotted 26 days ahead of the most recent price action.

So, you can quickly identify where future resistance and future support will likely be.

When you compare the Tenkan Sen to the simple moving average with the same periodicity, the Tenkan Sen shows the midpoints and flattens often, which represents non-trending price action during the previous 9 periods.

The Tenkan Sen can act as support and resistance too as you can see. While the price action breaks below the simple moving average, creating false triggers, the Tenkan Sen displays better support levels.

To spot momentum, you can examine the angle of ascent or descent.

A sharp angle of ascent signals strong momentum to the upside while a steep angle of descent displays strong momentum to the downside.

How accurate is the Tenkan Sen?

Well, because it is a shorter time period indicator, it tends to be less accurate than the Kijun Sen, which features 26 periods.

But it does provide a first glimpse that a trend may be on the verge of changing.

Kijun Sen

Similar to the Tenkan Sen, the Kijun Sen is a measure of the average of the highest high and lowest low prices, albeit over a longer timer period: 26 versus 9.

It is generally regarded as being more accurate because of the longer time span.

To figure out which way the trend is moving, simply look to the direction of the Kijun Sen.

When the price rises above the last highest high or falls below the last lowest low, the Kijun Sen will move up or down respectively to signal a bullish or bearish trend.

It can also act as a level of support on the downside and resistance on the upside.